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Scenario:

Mr. Johnson is the Procurement Director of ‘Modern Toys Ltd’, a toys manufacturer. The company actually purchases the electrical motors required for its toy car assembly at Rs 800 each. Mr Johnson has gathered data to facilitate him to decide whether it is worth manufacturing their own motors.

Fixed costs will be Rs 3 M per year and variable costs per motor will be Rs 350. The annual maximum capacity of Modern Toys is 10000 toys cars per year.

Using graph paper:

(a) At what percent of capacity does it pay the company to manufacture its own motors?

(b) What opportunity loss does the company make if it manufactures 9000 cars per year and still buys the motors?

(c) A new supplier has been identified selling its motors with same specifications at Rs 600 each. What decision must the company make and why?

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